There are several types of insurance organizations and arrangements that provide insurance coverages. Not all of them are corporations (or companies) that are in business to make a profit, but most of them are. The various categories of insurers represent the different ways they raise the money necessary to begin business and enroll their prospects for insurance. Although you need to understand the nature and structure of for-profit insurance companies, you should also know that there are other markets and providers of insurance, including non-incorporated private organizations and the federal and state governments.

Types of Insurance Organizations

In this chapter, the major types of insuring organizations are reviewed
first. Then we cover various aspects of insurance company operations and the
nature of insurance regulation.

Stock and Mutual Companies

Let's begin with a review of the two most common types of insurance
companies. The first type is called a stock company. When a stock company
forms, it sells stock to stockholders to raise the money necessary to operate
the business. Stockholders are not necessarily insured by the company, and
insureds do not necessarily own stock in the company. The company is in the
business of selling insurance. Profits attributed to the operation of the
company are returned as dividends to the stockholders, not the insureds.

NOTE

Nothing prohibits stockholders from buying insurance from their own company
or insureds from buying shares of stock issued by their insurer. However,
ownership of the company is completely independent from any contractual
relationships the company has with policyholders as a provider of insurance.

The second type, a mutual insurance company, functions differently
than a stock company. In a mutual company, there are no stockholders and the
policyholders collectively are the owners of the company. As owners, they can
vote to elect the management of the company. Profits are returned to the
insureds in the form of dividends or reductions in future premiums.

Most mutual companies are advance premium companies that charge
non-assessable premiumsthat is, policyowners are never required to pay
anything in addition to their premiums even if losses for the group exceed the
amounts paid in during the policy period. A small number of mutual companies are
assessmentcompanies, which charge members a pro rata share of losses at
the end of each policy period. The cost of coverage from an assessment company
will vary each policy period and can be small or large depending on the
experience of the group. Assessment mutuals are far less popular than
non-assessment mutuals because most people prefer to know that they will not be
assessed additional amounts regardless of the group's loss experience.
Assessment mutuals provide primarily fire and windstorm insurance for small
towns and farmers.

CAUTION

Both stock and mutual companies are incorporated. Their marketing practices
and internal operations are nearly identical. Their structures differ only in
the areas of corporate ownership and management control.

Reciprocal Insurers

Although not as common as stock or mutual insurers, coverage is also provided
by reciprocal insurers or exchanges. A member of a reciprocal agrees to
share the insurance responsibilities with all other members of the
unincorporated group. In a sense, all members insure each other and share the
losses with each other. A reciprocal is managed by an attorney-in-fact
who is empowered to handle all of the business of the reciprocal.

Lloyd's Associations

Another type of insuring organization is called a Lloyd's
Association. The term originated with the famous insuring group Lloyd's
of London, but today a number of other similar groups exist based on the same
model. These are not really insurance companies. They are voluntary associations
of individuals, or groups of individuals, who agree to share in insurance
contracts. Each individual, or "syndicate," is individually
responsible for the amounts of insurance they write.

Fraternal Benefit Societies

Limited types of insurance are also provided by fraternal benefit
societies.A fraternal benefit society is an incorporated society or
order, without capital stock, that is operated on the lodge system and conducted
solely for the benefit of its members and their beneficiaries, and not for
profit.

A type of insurance used by fraternal benefit societies is an "open
contract." Under this type of contract, the society's charter,
constitution, and bylaws become part of the insurance contract, and any
amendments to them automatically become amendments to the insurance contract.
The society is contractually obligated to pay; no amendment can omit or diminish
society benefits.

TIP

Fraternals offer insurance that is available only to their members. Most
write only life and health insurance.

Risk Retention Groups and Purchasing Groups

In 1981, Congress passed the Liability Risk Retention Act to give product
manufacturers more options when insuring against product liability. The Act
enables product manufacturers to establish group self-insurance programs or
group captive insurance companies, called risk retention groups (RRGs),
to protect them against product liability exposures. Federal law also enables
businesses in the same trade or industry with similar liability exposures to
purchase liability insurance on a group basis through purchasing groups
(PGs).Risk retention groups and purchasing groups are regulated in
the states where they are domiciled, but once formed they can transact business
in all other states.

TIP

Risk retention groups, as providers of insurance, must be licensed and
authorized as liability insurers in at least one state where they operate.
Purchasing groups, as buyers of insurance, are not required to be licensed or
authorized.

Self-Insurance

Some businesses and individuals choose to self-insure. With this
option, part or all the risk of loss is borne without the benefit of insurance
coverage to fall back on if a loss occurs. Some large companies are self-insured
because they have the resources to withstand losses and their claims experience
demonstrates that it is cheaper to be self-insured than to pay for insurance
coverage.

Private Versus Government Insurers

Providers of insurance can be privately owned or operated by the state or
federal government. The insurers reviewed so far (stock, mutuals, reciprocals,
and so on) are all examples of private insurers.

Historically, the government has often stepped in to provide insurance for
catastrophic type losses that is not ordinarily available from private insurers.
Sometimes it does this directly under government insurance programs; other times
it makes coverage available by providing reinsurance or subsidies to private
carriers.This type of insurance is sometimes called residual market
insurance. Over the years, the federal government has provided such things
as war risk insurance, nuclear energy liability insurance, flood insurance, and
federal crop insurance. State governments have organized insurance pools to
provide medical malpractice insurance and auto or property insurance for
individuals who are such poor risks that they can't obtain coverage in the
open market.

At the state level, governments have been involved in providing unemployment
insurance, and in some cases, workers compensation and disability benefits,
through various state funds.